How to choose the right claim payout option for your Term Insurance?
- Introduction
- Types of Claim Payout Options
- 1 - Lump-Sum Payout
- 2 - Monthly Income Payout
- 3 - Lump-Sum with Monthly Income
We have heard several cases of lottery winners losing all their money and becoming bankrupt. There could be several reasons behind such cases like- they could have lost their money on gambling, had minimal knowledge and invested in the share market, falling for a fraud investment, and so on. A large term insurance payout is not different. Your family will suddenly receive an amount of money - may be several lakhs, even crores - and might be clueless about how to manage it.
Further - while this might seem like a scene right out of an eighties Bollywood movie - there have been real cases of vicious family members defrauding unsuspecting nominees in rogue schemes for their claim amount too. Truth is - it is difficult to manage a large amount of money unless you have the aptitude for it.
And if you have even the slightest doubt that your family might be one of those, this article is super important for you. In this, we’ll discuss how you can avoid this situation, by choosing an appropriate claim payout option, based on your family’s financial aptitude.
In addition to several other customizations and features you can choose while buying your term insurance, there’s also an option to customize how your family will receive the claim amount.
Here are some of the most common claim payout options available with term plans today -
In this option, your nominee or family will receive the entire claim amount in one single payment. As soon as the claim settlement process is completed, the insurer will transfer the entire amount as a ‘lump sum’ into the bank account of the nominee/nominees. There’s a risk with this option, as we’ve already discussed above. If your nominee or family does not have prior experience in managing large amounts of wealth, they will most likely end up making poor investment choices here too.
When can this option be helpful?
There are some situations where getting a single payment of the term claim might help your family. For example, you might need to pick this option if you have some major loans (like a home loan) or liabilities that you prefer are settled off quickly. As soon as your family receives the amount, they can pay off the loan and become debt-free.
When should you avoid this option?
In the absence of a large loan to be paid off in the short term, you should skip this option if you are not confident that your family can manage the large sum of money.
In the monthly income payout option, the insurer provides your nominee or family with a fixed amount on a monthly basis for a certain period of time. It is like a replacement for your monthly income. Your family can then use this amount to take care of their monthly bills, EMIs, rents, etc. - for several years.
Note: Some plans also offer an ‘increasing monthly income’ option in which the amount that’s sent to your family on a monthly basis is increased by 5/10% every year. This can be a good option to help beat inflation, and always have adequate income to sustain their needs.
When can this option be helpful?
This is a great option if you feel your nominee or family cannot manage large amounts of money together but would need monetary support for paying off regular bills and everyday expenses instead. This can also be helpful in cases where your nominee/ family member is not financially well-versed and would be more comfortable getting this amount as monthly income support.
When should you avoid this option?
If you have major loans to be cleared off in the short term, and your family will have to lift that burden in your absence - you can avoid this option.
Further, if you’re very confident that your family will make good investment decisions by themselves or with the support of a good financial advisor - you can skip this option too, and just go for a single lump-sum payout.
This is a combination of the above two options. With this option, you can choose a part of the claim amount to be given to your family in one payment (as a lump sum). The other part will be converted into recurring monthly payments that will be paid on a regular basis.
For example, if your total sum assured is INR 1.5 Crores, you can choose INR 50 lakhs to be paid as a single payment to your family. The rest of the amount - INR 1 Crore can be split into monthly income payments based on your preferences.
As a result - they can pay off any pending loans and clear off the debts in the short term, and still get regular monthly payouts to address their monthly expenses.
When can this option be helpful?
This option can be helpful in most cases, as it gives a combination of options that address both the short-term and long-term financial needs of your family.
On one hand, this will ensure large debts are paid off, and on the other hand, protect your family from losing the payout amount in poor investment choices. This way, you will not only ensure that they are debt-free immediately, but are also financially secure for all their needs in the long term.
When should you avoid this option?
You should only avoid this option if you’re purchasing the term plan with a singular objective. For example, you only want to pay off a loan with the amount. Or you only want to provide a monthly income replacement for your family. Then, you can avoid this option.
Else, this is usually a good option that can be beneficial to most families.
In conclusion
We recommend you to check for all the options for customizing the claim payout available with your term insurance plan - and choose the right one based on your needs and your family’s financial aptitude. This will ensure that - when you are not around, your nominee or family does not have to face difficulty in managing the amount they receive.
You can check out Beshak TruMatch - the first-ever term insurance recommendation engine - that will help you choose the right claim payout option for your family, as well as other customizations you’ll need to pick so your term insurance plan is perfectly tailored to your family’s needs.
- Claim Payout Option is a feature that allows you to choose how your nominee or family will receive the claim amount.
- It is important to choose a claim payout option based on your nominee or family’s financial aptitude.
- Some of the common types of Claim Payout Option are- Lump Sum Payout, Monthly Income, and Lump Sum with Monthly Income option.
- In the Lump Sum Payout option, your nominee or family will receive the entire claim settlement amount in one single payment.
- You must only choose the lump sum payout option if your family or nominee has prior experience in managing large amounts of money or in case you have some major loans.
- The Monthly Income option provides your nominee or family with a fixed claim settlement amount on a monthly basis.
- If your family or nominee does not have experience in managing large amounts of money, then choosing the Monthly Income option would be a good choice.
- In the lump-sum with monthly income option, you can split the claim amount. One part can be given to your family as a single sum, and the other part of the claim amount can be used for the regular monthly bills.
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